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Unformatted text preview: aters per day) (a) Break even Price and cost (dollars per sweater) Price and cost (dollars per sweater) FIGURE 10.8 profit-maximizing number of sweaters produced. The
blue rectangle shows this economic profit. The height
of that rectangle is profit per sweater, $4.67, and the
length is the quantity of sweaters produced, 9 a day.
So the area of the rectangle is economic profit of $42
Figure 10.8(c) corresponds to the situation in Fig.
10.7(b) where the market demand is D3. The equilibrium price of a sweater is $17. Here, the price is less
than average total cost, so the firm incurs an economic loss. Price and marginal revenue are $17 a
sweater, and the profit-maximizing (in this case, lossminimizing) output is 7 sweaters a day. Total revenue
is $119 a day (7 $17). Average total cost is $20.14
a sweater, so the economic loss is $3.14 per sweater
($20.14 – $17.00). This loss per sweater multiplied
by the number of sweaters is $22. The red rectangle
shows this economic loss. The height of that rectangle is economic loss per sweater, $3.14, and the
length is the quantity of sweaters produced, 7 a day.
So the area of the rectangle is the firm’s economic loss
of $22 a day. If the price dips below $17 a sweater,
the firm temporarily shuts down and incurs an economic loss equal to total fixed cost. MC
profit 20.33 15.00
0 9 10
Quantity (sweaters per day) (b) Economic profit In the short run, the firm might break even (make zero economic profit), make an economic profit, or incur an economic loss. In part (a), the price equals minimum average
total cost. At the profit-maximizing output, the firm breaks
even and makes zero economic profit. In part (b), the market price is $25 a sweater. At the profit-maximizing output,
animation MR Price and cost (dollars per sweater) 204 MC
loss 0 MR 7
Quantity (sweaters per day) (c) Economic loss the price exceeds average total cost and the firm makes an
economic profit equal to the area of the blue rectangle. In
part (c), the market price is $17 a sweater. At the profitmaximizing output, the price is below minimum average
total cost and the firm incurs an economic loss equal to the
area of the red rectangle. 000200010270728684_CH10_p195-220.qxd 6/23/11 4:13 PM Page 205 O utput, Price, and Profit in the Long Run x Output, Price, and Profit Economics in Action
Production Cutback and Temporary
The high price of gasoline and anxiety about unemployment and future incomes brought a decrease in
the demand for luxury goods including high-end
motorcycles such as Harley-Davidsons.
Harley-Davidson’s profit-maximizing response to
the decrease in demand was to cut production and
lay off workers. Some of the production cuts and layoffs were temporary and some were permanent.
Harley-Davidson’s bike production plant in York
County, Pennsylvania, was temporarily shut down in
the summer of 2008 because total revenue was insufficient to cover total variable cost.
The firm also permanently cut its workforce by
300 people. This permanent cut was like that at
Campus Sweaters when the market demand for
sweaters decreased from D1 to D3 in Fig. 10.7(b). R EVIEW QUIZ
2 3 How do we derive the short-run market supply
curve in perfect competition?
In perfect competition, when market demand
increases, explain how the price of the good and
the output and profit of each firm changes in
the short run.
In perfect competition, when market demand
decreases, explain how the price of the good
and the output and profit of each firm changes
in the short run. You can work these questions in Study
Plan 10.3 and get instant feedback. 205 in the Long Run In short-run equilibrium, a firm might make an economic profit, incur an economic loss, or break even.
Although each of these three situations is a short-run
equilibrium, only one of them is a long-run equilibrium. The reason is that in the long run, firms can
enter or exit the market. Entry and Exit
Entry occurs in a market when new firms come into
the market and the number of firms increases. Exit
occurs when existing firms leave a market and the
number of firms decreases.
Firms respond to economic profit and economic
loss by either entering or exiting a market. New firms
enter a market in which existing firms are making an
economic profit. Firms exit a market in which they
are incurring an economic loss. Temporary economic
profit and temporary economic loss don’t trigger entry
and exit. It’s the prospect of persistent economic profit
or loss that triggers entry and exit.
Entry and exit change the market supply, which
influences the market price, the quantity produced by
each firm, and its economic profit (or loss).
If firms enter a market, supply increases and the
market supply curve shifts rightward. The increase in
supply lowers the market price and eventually eliminates economic profit. When economic profit reaches
zero, entry stops.
If firms exit a market, supply decreases...
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